How do mortgages work?
It is usually assumed that most people know how mortgages work. However, this is a question we get asked often especially by first time buyers.
Firstly, nobody WANTS a mortgage. However, if you have found a property that your want to buy and do not have enough funds to buy it yourself, you are going to NEED one.
According to the Cambridge Dictionary, the definition of a mortage is an agreement that allows you to borrow money from a bank or similar organization, especially in order to buy a house, or the amount of money itself.
Essentially a mortgage is a loan that you take from a lender (usually a bank of building society) to finance a property.
So, how do mortgages work?
Mortgages are offered by a range of financial institutions such as banks and building societies. Each lender will have its own range of mortgage deals and critieria upon which they base their lending decisions.
In a mortgage transaction, there are usually two parties:-
The Mortgagee - lender
The Mortgagor - the person borrowing the money
The lender will ask you to contribute towards the cost of the property by putting down a deposit. This amount varies depending on the lender, economic factors & the housing market in general.
Your deposit plus the mortgage taken from the lender will allow you to purchase the property.
For example:-
Amira has found a property that she wished to buy and it is on the market for £100,000. Amira has £15,000 deposit. This deposit is a combination of her own savings an a non repayable gift from her parents. In this scenario, Amira will need a mortgage for the difference between the purchase price and her deposit i.e. £100,000 - £15,000 = £85,000.
Amira need to apply for a mortgage for £85,000 to allow her to buy the property.
When Amira applies for her mortgage, consideration needs to given to the following:-
Affordabilty - Is this proposed mortgage affordable based on her income and expenditure
Term - How long does Amira want to borrow the money for e.g 30 years.
Different types of mortgages - For example Fixed rate mortgages, tracker rate mortgages, etc
What of features are important? - Amira may want the flexibility of making overpayments in addition to her monthly mortgage payment.
Having factored in the above points, a mortgage illustration can show the key features of the mortgage product. Amongst other things, this will show the monthly mortgage payments for the deal chosen.
Assuming Amira took out a Capital Repayment mortgage over 25 years, assuming Amira made all her required mortgage payments, at the end of the 25 year term, the mortgage would be repaid.
This article is for general information purposes only and does not constitute advice. The author does not accept liability for any errors or omissions. Readers are recommended to take professional advice from a suitably qualified professional regarding their own personal circumstances.